an economics scrapbook

The face of the river, in time, became a wonderful book . . . which told its mind to me without reserve, delivering its most cherished secrets as clearly as if it had uttered them with a voice.
-- Mark Twain

Recently I got into a discussion about housing in Los Angeles, and Reseda was mentioned as a place that may have reached an affordable level for purchasing a home. Of course, on an individual basis what is affordable is relative to a given buyer’s income and other personal variables, and so any area may or may not be considered affordable depending on those factors. Thinking about the issue more objectively, however, I was inspired to take a closer look at the income-to-price ratio in the enclave to find out in real terms if Reseda has hit a pricing equilibrium or if it still has room to fall.

Reseda is a quiet neighborhood in the city of Los Angeles, located in the central west San Fernando Valley. It was developed from a small farm town into one of the Valley’s first suburbs in the years following World War II. As much of the neighborhood was built up in the 1950’s, Reseda is recognized for it’s Mid Century architecture and Modern era housing tracts. Today it is one of the most racially and culturally diverse areas in Los Angeles. The town has been immortalized by songwriters like Tom Petty and Frank Zappa, and featured in films such as Boogie Nights, Magnolia, and the Karate Kid. It is known as a working class neighborhood without much glamor, but offers some good magnet and charter schools along with a reasonable cost of living.

The median annual household income in Reseda falls right into line with the median of the greater city of Los Angeles, at just under $50,000. In this respect Reseda stands as an almost perfect example of a middle class Los Angeles neighborhood today. Because of this, the area was not only hit by the wave of subprime loan defaults that popped the housing bubble in 2007, but is also beginning to see mid-tier market correction as a second wave of defaults hits the prime and jumbo loan markets. Since the effect of the latter default wave has not entirely played out, I suspect we have not seen a pricing bottom in Reseda. But let’s see what the numbers say.

As I’ve said in the past, house prices in any given area should be in line with the income level of the people living there. If we use the traditional formula that a home should cost no more than the equivalent of two and a half to three times the buyer’s annual household income, the median house price in Reseda should come in right around $150K. I decided to run a search with the Multiple Listing Service and see what Reseda has to offer at that price. The result was comical. There is currently one property listed for sale at $150K, and nothing for less than that. This includes all single family houses, condominiums, townhouses and multi-family dwellings currently on the market.

Since Los Angeles has often run a slightly wider income-to-price ratio historically, I figured I’d up the median home price to four times annual household income just to be generous. That would bring the Reseda median to around $200K. Running a search at the revised median brought up a total of twelve properties for sale. They are all condominiums, with 90% being short sales. There are currently 156 homes listed for sale in Reseda. Twelve short sale condos do not a median home price make.

So what is the current median home price for Reseda, actually? It is $300,000. While this is a huge drop from the bubble peak high of $534K in 2006, it remains fifty percent higher than incomes in the area can truly support. If we look at this another way, it would take a yearly household income of $100,000 to properly support the purchase of a typical home for sale in the city right now. That’s more than twice what people who live there make. And here’s a final test… just ask anyone enjoying a $100K annual income in Los Angeles if Reseda is a neighborhood they would aspire to buy a home in. They’ll most likely find that idea very amusing.

2 Comments on “Reseda Price Check”

Hi Jenny, don’t publish too much about ‘affordable’ houses in Reseda, or people will flock to the jewel of the Valley and push prices up again! Seriously though, good work. I like that Reseda is a sort of typical ‘Middletown’ – median income; not geographically center, but not on the far outskirts; etc.

And I think you are right about the economy overall. We have not established the conditions for a new regime of accumulation, and until we do so, the economy will flounder about. And all that overaccumulated capital needs to evaporate for capitalism to remain healthy. So thinks may get worse, at least for those who are being sloughed off like a bad sunburn from the economic beach party of the last couple decades.

So here is a question. What if the idea that we should only be paying a quarter to a third or out gross income on housing is not a golden rule, but one that changes with historical conditions? We can continue to measure housing prices according to this standard, but is it a standard that applies to human societies everywhere? Does (did, should) housing cost a quarter to a third in Europe? In rural Japan? in urban China today?

I can imagine that there are moments in history when housing simply costs more than in other moments. Could the availability of cheap raw materials have an influence on housing costs? For example, when the forests are all cut down, when wood is more expensive, does hsouring cost more? When making bricks costs more because energy costs go up, does housing cost more? When we think about all of society, it could be that it just costs more to house people these days. It certainly costs more to move people in cars these days, and that doesn’t look like it will ever reverse.

Anyway, I throw that possibility into the mix because your analysis is finally based on assumption about housing price/income rations that are specific to the twentieth century. I think it would be interesting to compare this experience with others, historically.

Interesting questions about housing in other times and places. I don’t know enough to answer them. My first thought was “How did serfs pay for housing in Feudal Europe, and what were their taxes like?” (I’ve heard rumors it was bad!) Of course, if you end up in debtor’s prison we can probably call the costs unsustainable. Then I thought “what did it cost to build an igloo five hundred years ago, and how do we measure that?” and “Can you even own a home in Cuba, who pays for it and what is the price?”

There are definitely moments in history when houses cost more than at other times. Look at the median four years ago in Reseda! However, if bubbles or raw material costs or any other factor drives up prices, it doesn’t mean people can just follow accordingly and pay more. If income does not rise correspondingly, they will have to limit the size of their home, rent at a lower cost instead of buy, move to a different area or so forth in order to keep within an income-to-housing price ratio that works. The question is, despite fluctuations in housing costs, differences in social structure or what forms income or price take in any given situation, does the formula remain consistent across the board that the sustainability of one’s housing is put at risk when one exceeds the limits of the 1:3 ratio? Culturally and historically specifics do change, but fundamentally there will be a breaking point despite those factors where available resources cannot support costs. It’s simply mathematical. As to whether that breaking point is widely variable or always occurs at the same ratio, I am uncertain.

So, I’ll have to look into that one more. Or perhaps you can do it and get back to me with what you find out! In the meantime, I will assert that the old tried and true twentieth century mortgage evaluation model remains sound and reliable in assessing home pricing in the US housing market today. People may stretch it to live in a metropolitan area or a higher priced neighborhood, but that doesn’t come without sacrifice and risk.

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